The proposed $160 billion merger of Pfizer (PFE) and Allergan (AGN) has not cured the problems with shareholder value. Keep in mind that — since October — Pfizer stock has lost about 14% of its value.
But then again, could this be a nice opportunity for value investors? Well, I think so.
Now, it is true that there are issues to consider with Pfizer stock — if not the whole pharma industry. With the upcoming presidential election, there will likely be lots of buzz regarding drug prices and potential reforms, which could ultimately squeeze margins.
Then there are the changing dynamics of the healthcare industry. For the most part, the large health insurers, such as UnitedHealth (UNH), Aetna (AET) and Anthem (ANTM), have been consolidating so as to help control costs, which often means focusing on pharmaceuticals.
Then again, there is nothing new about all this. And yes, investors have already been discounting the valuation of Pfizer stock anyway.
A Brighter Future for PFE Stock
Yet the acquisition of Allergan should help things. On the financial side, there should be strong financial synergies in terms of cost cutting and tax savings. Of course, the deal involves an inversion, which allows PFE to benefit from Allergan’s lower tax rates. The result is that adjusted EPS is expected to be accretive in 2018 and more than 10% accretive by 2019. Oh, and the combined cash flows are projected to be more than a hefty $25 billion as of the beginning of 2018.
But the deal also offers the potential for top-line growth, which is likely to spark the Pfizer stock price. First of all, the company should benefit by selling Allergan’s massive product line, which includes top sellers like Botox, within the global distribution footprint of PFE (less than 20% of Allergan sales are outside the U.S.).
Meanwhile, there will also be a boost to the pipeline. Consider that Allergan has been aggressive with buying up pharma companies, such as Actavis, Warner Chilcott and Forest Laboratories. So as a result, the company now has a strong pipeline of drugs. Just some that allow for blockbuster potential include rapastinel (a treatment for depression), Vraylar (which is for schizophrenia), Viberzi (for irritable bowel syndrome) and Relamorelin (for stomach complications).
So what could be the impact? It’s really tough to gauge. Let’s face it, drug development can be volatile. But according to a recent piece in The Wall Street Journal, the Allergan pipeline could add over $15 billion in sales during the next several years. Keep in mind that the combined sales of PFE and Allergan are currently about $60 billion.
But PFE is no slouch either. For example, the company has a strong portfolio of drugs as well, which also include various treatments in the fast-growing category of immuno-oncology treatments. These drugs essentially leverage a patient’s own immune system to combat disease, which often is more effective and prone to fewer side effects.
Bottom Line for Pfizer
All this looks pretty good, right? Definitely.
More importantly, the valuation on PFE stock is fairly cheap. The forward price-to-earnings ratio is 13X, which compares to 23X for Eli Lilly and Co (LLY) and 27X for Bristol-Myers Squibb (BMY). Besides, the company plans to buy back $5 billion in PFE stock during the first half of this year and the dividend yield is about 3.9%.
So if there is any good news — which seems reasonable in light of the strong Allergan pipeline — PFE stock could get out of its rut.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
